Following the Ring of Fire to the Geological Hot Spots
Source: The Gold Report (7/22/08)
Ron Parratt, president and CEO of AuEx Ventures, takes The Gold Report on an exclusive tour of the world's most geologically attractive areas for precious metals exploration. As a geologist and exploration manager for 30 years, Parratt has an exceptional record of discovery and development of North American gold projects. . . he shares his passion for the industry and his enthusiasm for some of his favorite junior explorers.
TGR: As you look around the world, where are the geological hot spots for precious metals?
RP: The hot spots vary depending upon the region's resource endowment and the political environment. Mongolia was a big hotspot for the past few years until the political situation changed. Aurelian's (Aurelian Resources Inc. TSX:ARU) discovery of the Fruta del Norte deposit — one of the bigger ones found in the last decade — drew a lot of interest to Ecuador. Political issues have also eroded the appeal of that area — at least for the time being.
TGR: Some areas possess abundant resources, but the political ramifications undermine the exploration potential. Other places are so remote it's too expensive to even consider mining. How do you balance all of these considerations?
RP: I have focused my career on the Americas — from Alaska, Canada, the U.S., Mexico, Central America, and through South America. This region offers enormous resource potential and attracts funding for exploration.
Although I am not familiar with Africa, I know it is very problematic. Areas such as Egypt might be good, but they are difficult. The Middle East fits that category. Saudi Arabia has a good endowment but the political environment is a big negative.
Australia has always been a good place to be for its endowment, political system, and language, but it has a lot of competition. After the Americas I would go there. The ore deposits are generally different than the ones I typically work with, but many are similar.
TGR: Let’s focus on the Americas. Is that where the best endowment is?
RP: It’s certainly one of the best and it’s linked to a phenomenon called the Ring of Fire. It’s a major geologic feature that runs from Japan up through the Aleutian Islands, along the entire west coast of Canada, the U.S., and all the way to the tip of Chile. It’s an area of very active tectonism, meaning there is a lot of faulting. This faulting leads to the development of a lot of intrusive rocks and most gold deposits have a relationship to igneous rocks.
This Ring of Fire is very active geologically, with lots of volcanoes and intrusives that foster the development of gold deposits, copper deposits and other metals. That zone and the areas to the east of it have been building deposits for many tens of millions of years. Nevada benefits from that.
All through Canada, Alaska, and Central America you see the same style of ore deposits. One of the great things about many of them is that you find similarity among these deposits whether they occur in Canada, U.S. or even Chile. Once you’re familiar with them, you know how to explore them.
TGR: Where are the properties with the biggest concentrations of gold deposits?
RP: If you’re a large gold explorer – a Barrick (Barrick Gold Corporation (ABX.NYSE, TSX, LSE, BOURSE) or a Newmont (Newmont Mining Corp. NYSE: NEM) — you're looking for the biggest gold deposits. There are many varieties of gold deposits, genetically speaking, in terms of how they form, and you’re always looking for the biggest. Some deposit types more commonly form the large deposits such as Carlin type found in Nevada.
Another type of gold deposit being mined by other companies is the low sulfidation style like the Round Mountain deposit in Nevada and the Fruta del Norte deposit. Companies tend to explore by genetic model types. You will look for types that are most prevalent in your area so that you can find big gold deposits.
TGR: Are there more genetic types that would yield big gold deposits yet to be discovered?
RP: We're always looking for that new model. The Carlin gold deposits were recognized in the '60s as a unique new class of ore. The Witwatersrand deposits in South Africa — the so-called "Wits" — is an enormous gold system, one of the biggest in the world. People have looked for analogs to that for a long time, and they’ve never found one anywhere else. It appears to be a uniquely, large paleoplacer occurrence.
There could be another type of disseminated gold deposit not readily forming placer occurrences hosted in a rock that no one has discovered. But with each passing year and increased exploration activity the likelihood of finding something new like that diminishes.
TGR: Would there be new mining technologies that might make different types of deposits more financially attractive?
RP: That’s always been the case. Cyanide technology, which recovers gold beautifully, is 110 years old now. It was a real boon for the industry around 1890. The advent of heap leaching in the late '60s revolutionized our ability to process low-grade ores.
The next breakthrough may be a means whereby the so-called refractory gold ores — those not directly amenable to cyanide — might be treatable by some new low-cost process that would allow you to treat ores in the range of a gram or two. If you have a large gold deposit consisting of refractory material that’s in the 1 to 2 gram range, it’s very difficult to find a way to treat that kind of material. A new technology for treating lower grade refractory ores would be very good for the industry.
TGR: Is that new technology required and/or are there enough existing mines or properties to satisfy the demand?
RP: Worldwide gold production has been slowly declining over the last six or seven years. At the same time, demand has increased. This is one reason the price of gold has gone up. Gold is a funny metal, as you well know. There’s an awful lot of it sitting in safe deposit boxes and vaults. Aboveground stocks are quite substantial relative to the newly produced supplies.
TGR: If these aboveground stocks did enter the marketplace, how would that impact the gold price?
RP: This gold is predominantly controlled by central banks as part of their holdings to back the securities or currency that they issue. No country holds anywhere near enough gold to guarantee their currency, but all have some degree of backing.
When central banks sell, it definitely drives down the price of gold. The price drop has an adverse impact on my ability to raise money and conduct exploration. With all the currency deflation problems we’re facing now, whether it’s the Euro, the dollar, the yen or any worldwide currency, gold is the ultimate and the only backing.
TGR: The price of gold equities and the physical metal have not been in lockstep. How do you explain that?
RP: For the most part, the price of shares of stocks of large- and medium-sized gold producers do move quite well with the price of gold. If gold goes up $10 an ounce and you produce 1 million ounces of gold, then you’re going to have earnings of $10 million more, provided there is no commensurate increase in investment or operating costs.
But there are always periods when gold simply falls out of favor. There are fears that inflation will be low and the dollar will be strong and gold will not be a good investment. Investor sentiment then rotates to other commodities maybe oil, copper or zinc.
Potash and cobalt producers are currently in vogue. There’s only so much money seeking this kind of investment. When there’s a shift of interest to another commodity, gold producers may experience a short-term decline in prices.
There’s no question when you look at long-term trends for companies like Newmont or Barrick, the rising gold price lifts their share prices. And it goes up usually in greater proportion percentage-wise than the price of the metal itself.
TGR: That’s why investors like them.
TGR: Getting back to the geology discussion, how would you advise investors to weigh the risk-adjusted rewards of investing in companies situated in Nevada and Argentina?
RP: I would not advise you to invest in just one or two companies. None of us is smart enough to pick one, two, or three companies. I am not sure how many juniors are exploring in Nevada. There are quite a few and more are on the way.
I would identify at least 10 or 20 of the best-managed ones with the most experienced staff that are working in good places. This approach would apply to any area. Argentina has a bit of a plus in that it hasn't been explored as extensively as Nevada. That alone increases the opportunities for discoveries.
Mining started in Nevada right after the Gold Rush in the early 1850s, and there have been many waves of exploration since then. A lot of gold and silver has been discovered. However when you’re out in the field and when you begin walking around, you realize just how big a place Nevada is and how small a major ore deposit can be. It's a given that there's still lots of opportunity.
TGR: You mentioned Argentina as being less explored relative to Nevada. What other Latin American countries are underexplored?
RP: One country that has not seen much activity is Colombia. It has the same geology as Peru and Ecuador, but people have been reluctant to go there because of the security problems. A few brave parties have gone down and identified a couple of decent deposits.
Peru had similar problems until Newmont ventured in and was grandly rewarded with Yanacocha. The politics can chase you out, though. In Mexico, up until 1990 or so, you had to have a Mexican partner who would own 50% of the property; you couldn’t own 100%. Today, any North American company can go into Mexico and acquire property just like any Mexican company. That’s what happened in Argentina, too, and it's made the country more attractive for western companies.
TGR: As we go around the Ring of Fire, what about Chile or Ecuador?
RP: Based on what’s been found at Fruta del Norte, Ecuador is a great place to explore. But the recent restrictive legislation has stifled exploration. Bolivia has also nationalized some mining interests. Chavez seems to be nationalizing everything in Venezuela. I worked a little bit in Venezuela for Homestake (Homestake Mining, merged into Barrick Gold Corporation in 2002). We had property positions there.
Brazil, on the other hand, has been fairly stable, and it has a lot of diversity in mineralization. Vale (NYSE:RIO), formerly Companhia Vale do Rio Doce (CVRD), as the company was known until 2007, recently began to function there as a stand-alone public company. It was a national company before that; it’s been doing great.
Chile’s always had a great mining history despite some political ups and downs. Of all the countries in South America, Chile is probably one of the best if not the best to be in because of its history, its attitude toward mining, and its endowment. We’re looking at opportunities in Chile as well as in Argentina.
TGR: Let's shift the conversation to companies. Other than your holdings in AuEx Ventures (TSX.XAU), what other stocks do you own or find interesting?
RP: All investors have a different risk-reward tolerance, and some can handle the early stage exploration companies like AuEx Ventures. Miranda Gold Corp. (MAD.V) is another explorer that I like and have invested in. Others prefer more advanced plays with companies that already have discovery and are developing the project. Some investors go for the small producers. It's important to assess the degree of risk you can tolerate and decide what level of this game interests you.
Miranda Gold Corp. (MAD:TSX-V) has a business model much like ours. Ken Cunningham, who manages that company, is highly regarded by the mining industry as well as the investment community. He has a good team of people. They are all very experienced; they have a good portfolio of properties in Nevada. They’ve just initiated an effort in Mexico. I think Ken has a very good chance to come up with a discovery.
Another company with a great portfolio and lots of properties is Allied Nevada Gold (ANV.TO). This is a relatively new company, more or less a spin-off from Vista Gold that was combined with a bunch of assets owned by a man named Carl Pescio, who is working with Allied now. Carl is an excellent prospector whom I have known for years. He’ll pull in more and more opportunities for them as they go forward. I know they’re working pretty aggressively on the Hycroft property right now, and are hoping to put that back into production. They’re a more advanced group than we are and hold a bigger land position. They are well financed too, and not a bad company to place a bet on.
TGR: Do they have low-grade gold?
RP: The Hycroft property is quite low-grade, but it’s very shallow, so the stripping ratio is very low. The metallurgy for some of the ore is favorable to heap leaching. They have a lot of low-grade refractory material, and would benefit substantially from a new technology that could heap leach or treat refractory gold ores.
One of our partners, Fronteer Development Group (FRG)—Mark O’Dea's company — is now quite active in Nevada and is run by an excellent team of people here in Reno. I know them all very well. They’re doing very good work on our joint venture, and exploring in a number of other places as well. They have one property in a deal with Newmont. A lot of their share price is tied to a uranium district play in Labrador, through Aurora Energy Resources (TSX:AXU), in which Fronteer has a large stake (42%).
They have had some problems there recently and have been punished quite a bit in the marketplace — maybe to an extreme. For that reason, they may be undervalued. I know they do good work and have a good chance for success here in Nevada.
TGR: All of these explorers are Nevada-based. Are there companies outside of Nevada that you find are interesting?
RP: I like Exeter Resource Corporation (AMEX: XRA,TSX.V: XRC, Frkt: EXB). I’m impressed with how they continue to come up with interesting projects. They had the Don Sixto property in Mendoza province in Argentina, and when things turned sour there, they pulled a rabbit out of the hat with the Cerro Moro Gold-Silver Project property in Santa Cruz province, also in Argentina. Now they’re drilling what sound like very good holes in Caspiche in Chile.
They seem to be quite well managed. They’re certainly producing some very good results, and their share price reflects that. They’re still doing quite well.
TGR: To what do you attribute the fact that they keep finding interesting things?
RP: They must have a group of highly experienced geologists who know property. Cerro Moro came to them, as I understand, through a deal they made with Anglo Ashanti ( AngloGold Ashanti Limited (NYSE: AU). When Exeter began to drill at Cerro Moro and were producing good results, they reached a point where Anglo had a back-in right. For whatever reason, Anglo chose not to exercise their right.
TGR: Do you have any predictions about where the price of gold is going?
RP: I try not to focus on the ups and downs from day to day, week to week, or even month to month. Instead I watch the fundamentals of the U.S. dollar and paper currencies in general, and the demand for metals in the developing worlds — China, India, Indonesia.
When you look at all of that — assuming the U.S. trade deficit with China continues to grow along with ongoing demand for metals in that part of the world — it points toward long-term upward pressure on gold prices. Metal prices won't be high like this forever, but we are seeing a meaningful economic boom in that part of the world. It may well last for a long time.
TGR: Are you talking about the value of using gold as a hedge against inflation or about base metals for developing infrastructure?
RP: China is now the largest consumer of every major metal — iron, aluminum, copper, lead, zinc, molybdenum, tungsten — many of which are used in construction. But the economic boom has raised the standard of living, making it possible for many to afford precious metals. If enough people in China, for instance, purchase just a little bit of gold or silver, that translates into a huge demand.
TGR: This might be a good point to discuss your company, AuEx Ventures.
RP: As you go down the food chain from seniors, to mid-tiers, to small juniors, which describes AuEx Ventures at this stage, the risks for economic success go up dramatically. That's why we’ve chosen our particular business model.
We know that most of our projects won't be successful. To explore their projects, companies have to go the markets and raise money, and you can only do that for so long. We have chosen to minimize that by using joint ventures instead.
We acquire properties, develop them and then get companies like El Dorado Gold Corp. (ELD.TO, EGO-AMEX) to expend the higher risk dollars. Our partners pay to explore and we accept dilution in our equity ownership for the properties. Our shareholders don't have anywhere near the same degree of share dilution.
This approach has made it possible to keep our share structure tighter. In the long run, as we and our partners make discoveries and create real value, we will realize share price appreciation given our tight share structure. In our view it's working; our share price has held up well recently. We’re still above a couple of dollars, have $4 million in the bank, and we’re doing a lot of work this year. Our partners will spend well over $7 million on our projects. That’s what it takes to make discoveries.
TGR: Are the junior explorers really being hurt by the shortage of qualified geologists?
RP: That is clearly a problem. Things began to get difficult in 1997 when the price of gold started to decline. Companies were laying people off. There were a lot of acquisitions. Whenever the larger companies would buy a company, the exploration staff of the company they bought would be one of the first groups they let go. Many geologists left the business or retired.
Now that metal prices are up and the demand is up, we lack skilled personnel. The universities don’t have as many geologists in their programs; it’s improving because the jobs are there now, and the pay is very good. New masters graduates of the better schools start at $75,000 to $80,000 a year. More young people are entering the business again and we need them.
TGR: Is it common for CEOs to be geologists?
RP: It’s more likely to happen among the juniors. If I were an investor, my first question would to ask which of the companies do geologists run? And how much experience do they have? I'm not saying lawyers, accountants and financial types couldn't manage a company but, I guess I have a bias; I would be looking for junior companies run by geologists with exploration experience. Alan Branham at Midway Gold Corp. (MDW) is a geologist. I like Alan, know him well; he’s a bright, capable guy.
TGR: We interviewed Rick Rule of Global Resource Investments this morning, and asked him when we would see some real price appreciation in the gold juniors. He said to focus on the companies themselves, not the sector. The sector will underperform because too many exploration companies took a bunch of money and aren’t discovering anything. He also said that a couple of large, exciting finds would re-engage investors. Do you agree?
RP: I do. Fruta del Norte is really the only big new discovery. Beyond that there hasn't been much. The only new greenfield discoveries that I am aware of that have been identified in Nevada are Long Canyon and maybe Midway's Spring Valley.
There hasn't been a really major new discovery in Nevada that would serve as the lightening rod to pull others in and get people excited. A discovery by one of my peers is good for all of us.
TGR: When do you think we will begin to see consolidation?
RP: What typically happens is that people develop assets, then run out of steam in their ability to fund and finance them. Somebody a little bit bigger decides to acquire the asset, take the dilution and grow their company.
When I was with Santa Fe and Homestake, we were looking at merger partners all the time with advanced properties. You have to grow your company in any one of a number of different ways; you would prefer to do it organically through discovery with your exploration team because that's the way you can add ounces to your portfolio at the lowest cost per ounce. But when discoveries are not being made or aren’t enough, then you acquire. Some of that is happening now but it’s hard to say when the pace might accelerate.